Perception of Decline Troubles America

"WHO AM I? Why am I here?" So went Vice Admiral James Stockdale's surprisingly existential outburst in his slightly more than fifteen minutes of fame as a vice presidential candidate. But the comment could just as easily have issued from the entire nation, which was suffering last year from a collective identity crisis. With the Cold War over, the United States had become unsure of its place in the world. And its two major industrialized partners, Europe and Japan, were both suffering from a loss of purpose as well. The result was a year of confusion and drift in the management of the international economy.

The numbers were bad enough. Economic growth in the industrialized countries crept ahead at a sluggish 1.5 percent pace in 1992-not enough to keep unemployment from rising. The jobless rate in the countries of the Organization for Economic Cooperation and Development averaged 7.9 percent over the year and was projected to creep up to 8.2 percent in 1993.

But the debilitating problem was less one of production than of psychology. In the United States, in particular, the mood was extraordinarily sour, as Americans developed a gloomy foreboding, not seen since World War II, that their nation was caught up in an inexorable process of economic decline and that their children's generation would not live as well as they had.

Polls early in the year by The Wall Street Journal and NBC News found that 66 percent of voters felt that the United States was "in a state of decline," Most said they feared the next generation of Americans would not live as well as the current one. And 72 percent rated Japan as a stronger economic power than the United States. But the most stunning measure of America's pessimism came when respondents were asked to rank America's relative economic power: only 17 percent of voters still believed the United States was the world's leading economic power, and an astounding 43 percent believed it was not even in the top tier.1

To be sure, these perceptions are not justified by the facts. By almost any measure that makes sense, the United States continues to lead the world in economic output, productivity and living standards. The dismal picture of U.S. economic standing that dominates public consciousness-and which was reinforced last year by presidential candidate Ross Perot's gloomy "infomercials"-is exaggerated. And the notion that the next generation will not live as well as the current one has little grounding in either history or logic.

But perception is a reality of its own. And it was these sorts of perceptions that shaped political and economic developments for the United States and its major allies in 1992. Uncertain of its own standing in the world, the United States was in no position to meet the need for global leadership in either trade or finance. And consumed with post-Cold War identity crises of their own, neither Europe nor Japan could fill the gap. Global trade talks faltered, and the Group of Seven (G-7)-intended to be a kind of board of directors for the world economy-proved powerless to influence the course of events.

Baby Boom Expectations Go Bust

THE AMERICAN identity crisis is rooted in attitudes of the baby boom generation, which by its very size has come to dominate the nation's culture. Economic progress was something baby boomers grew up taking for granted. A house, two cars in the garage, a color television and a kitchen full of appliances were standard equipment, and the notion of a steadily rising living standard was considered a birthright.

Baby Boomers were the Donna Reed, "Leave It to Beaver" generation. Unlike their parents, who were raised in the depression, they were optimistic about their economic futures. Their only real source of collective insecurity was rooted not in economics but in global politics. Products of the Cold War, they recall their years in grade school participating in civil defense drills. And while global communism and the bomb posed the greatest threats to their future, those fears also provided them with an odd source of national identity and purpose. The United States was the great shining light of freedom in the world, the pinnacle of capitalism and democracy, the antidote to communism.

Then, almost overnight, that identity disappeared. Communism proved its own antidote, and the United States was left to search for a new self-definition. Spurred on by recession, the baby boomers took a hard look at what had been happening to the U.S. economy, and what had been happening to their own earning power and living standards. And they did not like what they saw.

Since 1973 the productivity of American workers-which galloped along at a three percent annual rate of increase in the 1950s and 1960s-has slowed to one percent. With productivity growth down, wages have stagnated. The average hourly earnings of the nation's workers, adjusted for inflation, have actually declined. Living standards rose during the period, but primarily because more and more families sent a second wage-earner into the workforce, and because consumers increasingly relied on debt to pay for what their incomes could not buy.

The gap between what has happened over the last 20 years and what might have happened if the productivity of American workers had continued to move ahead at a three percent rate was graphically illustrated by economist Robert Solow at President-elect Bill Clinton's economic conference in December. In the 1950s and 1960s, he explained to the group gathered in Little Rock, family income rose fast enough to double in just about 30 years. In the 1970s and 1980s, it slowed to a pace at which it would take about 200 years to double family income.

"The U.S. standard of living is very good," the economist told the president-elect. "It's staggeringly good compared with most of the rest of the world. But people are more optimistic, more generous, more confident when family income is rising at a decent pace. When incomes stagnate, there's always fear of trouble around the corner."

It was that fear of trouble around the corner that came to the fore last year. The United States turned inward. And the enlightened national self-interest that had led to the creation of institutions like the General Agreements on Tariffs and Trade and the G-7 became twisted into a less generous, less enlightened mindset that looked for new ways to subordinate international economic arrangements to satisfy the nation's economic insecurity.

Mission To Tokyo

NO INCIDENT PROVIDED a more glaring illustration of America's economic problems than President Bush's trip to Tokyo in January. Originally scheduled to occur two months earlier, the trip was designed by Secretary of State James A. Baker as a way to cement the "global partnership" that he had promised the Japanese since the early days of the Bush administration. In the New World Order sketched out by Baker strategist Bob Zoellick, the U.S.-Japan relationship was to be a critical part of the structure that would keep the world on the road to peace and prosperity. But having watched the Bush administration focus its foreign policy first on events in eastern Europe and the Soviet Union and then on the Middle East, the Japanese understandably worried that the partnership was more rhetoric than reality. The president's trip to Tokyo was intended to be a grand gesture finally to deliver on the promise of a closer working relationship.

As signs of a U.S. economic recovery flickered out in the fall of 1991 5 and as the nation's economic pessimism deepened, the purpose of President Bush's trip changed. It had been postponed at the suggestion of White House Chief of Staff John Sununu, who belatedly decided that the president needed to be at home tending to domestic problems. By the time the trip resurfaced in January, on the eve of the presidential primary season, it had been transformed from a broad-minded diplomatic junket into a mercantilist trade mission. At the urging of Commerce Secretary Robert Mosbacher, the president invited a planeload of businessmen to join him, including the chairmen of the Big Three auto companies, who have increasingly drifted toward trade protectionism in recent years. Talk of global partnership was pushed into the background. Instead, President Bush became a super trade negotiator-not because it suited his instincts, but because it suited his nation's mood.

Some analysts were quick to defend the president's decision to travel with chief executives and focus on trade, arguing that the leaders of other nations-including Japan-do the same on a regular basis. Still, for the leader of the free world to travel to Tokyo with his nation's businessmen in tow was a jarring sight. This was not a leader with a vision of a New World Order; it was merely a man out to make a buck for his country. The Japanese newspapers ran cartoons portraying the U.S. president as a street vendor with a table full of trinkets. "It demeans the presidency for him to act like a car salesman," complained Reagan economic adviser William Niskanen, now chairman of the libertarian Cato Institute.

Having popped their speculative bubble of stock and real estate prices, the Japanese finally suffered the unpleasant side effects in 1992. In the past, the growth-addicted Japanese had used the word "recession" whenever their torrid expansion rate slowed below 3 percent. But last year a true Western-style recession hit, shrinking the national economy by 1.6 percent in the second quarter.

In an effort at self-delusion, Japan's economic planning agency continued to predict 3.5 percent economic growth in 1992 right through the end of the year, but almost everyone recognized the projection to be far from reality. The slowdown did prompt the Japanese government to do what U.S. officials had been urging for several years-adopt a huge public works program to stimulate the economy. But it also left Japan, like the United States, in a state of self-doubt, and in no position to step up to a leadership role in the world.

The Collapse of EG Coordination

THE UNITED STATES and Japan were not alone, of course, in their angst over their places in the post-Cold War world. Germany was suffering through an even more severe trauma, driven by its determination to integrate its east and west. The cost and difficulty of that undertaking proved to be far greater than the Germans had ever expected, with an estimated 170 billion deutsche marks transferred from west to east over the course of the year. Much of that cost was financed through public borrowing, with the deficit rising to more than three percent of the nation's output.

But the biggest fears arose from immigration from the east-and the prospect of even more-and inflation, which has continued to frighten Germans since the days of the Weimar republic. Inflation crept steadily upward to near five percent, a worrisome number for the Germans, and the trend was reinforced by steadily rising wages. In western Germany wages were increased at an average 5.5 percent rate, and in the east demands for wage parity pushed wages to 60 percent of western levels-even though east German productivity is only one third the level in the west.

Bundesbank President Helmut Schlesinger is often portrayed as the villain in the collapse of international economic coordination last year, but under the circumstances of rising prices and wages, and given the German obsession with controlling inflation, he had little choice but to raise interest rates. As German rates rose, other European nations were forced to follow suit in order to keep their currencies in line with the mark.

At the world economic summit in July the G-7 heads of state attempted to pressure Schlesinger into easing his tightfisted stance. They adopted a communiqué filled with laudatory language about the importance of stimulating growth. But as if to prove that G-7 summits have deteriorated into meaningless exercises, Schlesinger turned around shortly after the meeting and raised rates once again. By September the German Lombard rate had reached an extraordinary 9.75 percent-a 61-year high. Other European nations were forced to struggle to keep up the pace, as market traders began betting on the inevitable breakdown of the European currency system. In Sweden, overnight interest rates were pushed to an astonishing 75 percent.

Finally, in mid-September, the system broke. Britain and Italy both pulled out of the European exchange rate mechanism and, in response to pressure, the Bundesbank's Schlesinger finally agreed to a very stingy cut in interest rates. U.S. Treasury Undersecretary David Mulford employed great twists of logic in order to hail the Bundesbank's belated move as a sign of the triumph of economic coordination. But in fact, coordination-the purpose of which is to deal with problems before the crisis hits-had failed dismally.

Flagging EC Stalls Trade Talks

THE EFFORT to bring global trade talks to a successful conclusion was equally unproductive. At the Munich summit the United States found its efforts to negotiate a reduction in farm subsidies met by a wall of European resistance. France was the main source of the problem, but other European nations lined up behind it. President Bush made what summit-watchers called a surprisingly timid effort to break down their resistance.

The trade disagreements were aired at a dinner for G-7 foreign ministers at the baroque Nymphenburg Castle, with an emphasis on how to cut agricultural subsidies in a way the Europeans could accept. At one point the Europeans appeared close to agreeing on a target figure for reducing farm exports. But when Secretary of State Baker turned to French Foreign Minister Roland Dumas and asked, "Are the French ready to move?" Dumas replied curtly: "No." "Even if you get all the concessions you are asking for?" Baker followed. "No," Dumas said again.

The European reluctance to come to agreement on the trade talks in part reflected the crisis going on within the European Community itself. The optimism about European unity that infected the European economy in the late 1980s had disappeared by 1992, replaced by growing concern and pessimism. The Maastricht treaty had called for an unprecedented degree of coordination among the European countries, but it became clear that the leaders who negotiated that treaty had lost touch with their own constituents, who were growing increasingly wary of the notion of European integration.

With such problems at home, European leaders could scarcely afford generous diplomatic gestures overseas. At the Munich summit, French President François Mitterrand said that President Bush "represents the interests of a great country, a great power in the world," but that "as for me, I represent the interests of France, which are not necessarily the same."

Reviving America's Confidence to Lead

ECONOMIC AND POLITICAL conditions conspired to make 1992 a bad year for global economic management. Recession, election and a number of one-time problems contributed to the tendency in the United States, Europe and Japan to look inward. Because those conditions are temporary, there is reason to expect better days ahead.

But there is also a fundamental question about the future that the United States and its major allies must answer. It was posed eloquently by World Bank economist Lawrence Summers in his presentation to President-elect Clinton's economic conference. "The Cold War is the third war to have ended in this century," Summers said. "After World War I, there was no leadership. Nations turned inward. There was no effort to rehabilitate and reintegrate the vanquished power. There followed 20 years of stagnation, depression and ultimately the Second World War. After World War II, things were very different. The United States led. The world economy grew together. Enlightened policies-the Marshall Plan-sought to rehabilitate and reintegrate the vanquished powers. And there followed the best 40 years of economic growth in the history of the world.

"Now, the Cold War is over. Will the unhappy post-World War I experience play out or will the happier post-World War II experience play out? That is the question that will be answered in the next four years."

In one sense, the election of Bill Clinton gives cause for hope. By instinct, he is an internationalist and a free trader. And his triumph in the 1992 election was a sign that protectionism and isolationism still do not sell in America.

In the Democratic presidential primaries, the candidates who peddled protectionism did surprisingly poorly. Senator Tom Harkin of Iowa, who was the most protectionist of the Democratic field and had a populist style on the stump, failed to capture any significant support. And Senator Bob Kerry of Nebraska still considers the vaguely protectionist television advertisement he ran in New Hampshire-comparing world trade to a hockey game and suggesting that the United States needs a stronger defense-as one of the big mistakes of his short-lived campaign.

Jerry Brown, who outlasted Harkin and Kerry, thought he could beat Clinton in Michigan by attacking the North American Free Trade Agreement. But even in Michigan, where taking a sledgehammer to foreign cars was once considered a local pastime, Clinton triumphed. And on the Republican side, despite the widespread disillusionment with President Bush, Patrick Buchanan's hard-edged "America First" campaign never caught on.

But Clinton also ran on a campaign that gave little attention to the rest of the world. Once elected, he appointed a deputy director for veterans affairs before making his first foreign policy appointment. He is surrounded by advisers and Democratic legislators who urge him to "redefine" America's relations with the world by making international institutions serve more directly the domestic needs of the United States. His commitment to gatt is unclear. Clinton's Treasury Secretary, Lloyd Bentsen, comes to his job lacking in the international credentials of a man on whom the world will depend for reinvigorating global economic management.

There is, however, a paradox in the current global environment. Only the United States is in a position to lead. Events of 1992 made clear that it may be a decade-or even decades-before Europe has sorted out its internal problems and can turn its attention to world affairs. And Japanese economic problems have set that nation back even farther on its long road to assuming a global leadership role.

But the United States can lead only if it sees itself as a leader. As long as Americans view themselves as being in a state of decline, or as a second-tier power, they will not provide support for the kinds of policies necessary to keep the world economic and financial systems strong. As president, Bill Clinton will first have to restore the confidence of Americans in their own country and its economic abilities. He must give the nation a new identity to replace the one it lost with the end of the Cold War. Only then can he expect to provide the economic leadership that the world desperately needs.


1 Respondents were asked, Which one of the following statements do you think best describes America's economic position? America is the number-one economic power in the world today... 17 percent; America is one of a few, about equal, major economic powers... 37 percent; America is a major economic power, but not one of the leaders...32 percent; America is no longer a major economic power... 11 percent.

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